Richard Lyons, co-host of The Wendel Forum and Wendel Rosen Green Business Attorney

In the early 1980’s, Lyons was practicing business law when he worked on one of the early wind power projects in the Altamont Pass. Since that time, he has continued to work on wind power projects and has worked with solar power companies too. Before long, he began to hear about the business activity related to natural and organic products. He attended his first Expo West – the trade show devoted to natural and organic products – in the 1990’s.

“I was amazed by the number of companies, the different types of foods and the overall energy of the people,” he recalls. The natural products industry expanded even more with the creation of Whole Foods, which retailed natural products across the nation. Since then, he’s represented many natural foods companies, including United Natural Foods Inc., which is now a $5 billion company thanks in part to mergers and acquisitions that Lyons worked on.

Around the same time, Lyons wanted to create a cohesive law firm practice group that would focus on representing companies that benefited the environment. As co-founder of Wendel’s sustainable business practice group, he also wanted to incorporate sustainable practices into the law firm itself. Together with his co-founders, he was able to convince his partners that recycling and energy saving measures were also good business.

Sustainable business start-ups face many of the same issues as new companies in other industries, but they often have specialized concerns, according to Lyons. For example, if the product is certified organic, there may be supply chain issues. In addition, these companies are often formed not just to make a profit but also to achieve larger social goals such as having positive effect on the environment and their community. They also need capital from investors that have the same social values and expectations about the return on investment.

From co-hosting The Wendel Forum radio show, Lyons (who, incidentally, played and recorded the Forum’s intro and outro music) learned that people start sustainable companies for one or more of the following reasons: they had an epiphany related to sustainability, they wanted healthy products for themselves that they couldn’t find, or they wanted to benefit the environment and the community.

We’d love it if you would share your favorite Wendel Forum moment with us. What was your favorite interview with Dick as host?

Founded in 2008, White Road Investments is venture capital firm backed by several current and former executives of Clif Bar. (Clemens is senior director of corporate finance at Clif Bar. Bagni is president of Alien Truth Communications and former marketing vice president at Schwinn Cycling & Fitness.) The company invests in health and active lifestyle businesses, including consumer products and outdoor companies.

Clif Bar is motivated not just by financial return but by a five-pronged philosophy, which is to promote the sustainability of its planet, community, people, business and brands. That same philosophy applies to White Road Investments. Clemens and Bagni are specifically looking to fund companies that are mission-driven and that will have a positive impact on the environment and community. The directors want to work alongside entrepreneurs who are eager to learn, grow and do more good. In particular, they’re interested in investing in new categories and new products. For example, they’ve funded a dehydrated pet food company. Currently popular categories in the health space include gluten-free products, plant-based proteins, raw foods, minimal-ingredient foods and bike businesses in urban markets.

In particular, White Road Investments funds with companies with $1 million to $25 million in revenue, with a particular focus on those in the $2 million to 7 million range. An investment can range from $750,000 to $2 million with $1 million being the sweet spot.

The company’s directors want to get deeply involved in the companies in which they invest, beyond simply a quarterly check-in. Realizing that great businesses may take awhile to succeed, the focus of White Road Investments is longer term than most VC firms. In addition to funds, White Road Investments offers companies its expertise, including marketing, operations, strategy, finance, branding and sales advice, as well as “connective capital,” the ability to provide connections from its directors’ longstanding business relationships. White Road Investments also offers the resources of Clif Bar, including the ability to test new products with Clif Bar consumers, who are usually the perfect target demographic.

Richard Chien, PACE program manager at SF’s Department of the Environment

San Francisco’s PACE program uses stimulus funds to improve the environmental performance and reduce greenhouse gas emissions from the City’s existing building stock. Part of the Department of Energy’s green building policy, PACE launched the commercial building program a year ago. It’s first project is Pier 1, the headquarters of Prologis, the country’s largest industrial real estate company.

Aaron Binkley, Director of Sustainability at Prologis

At a cost of $1.6 million, the PACE-Prologis project will include rooftop solar panels and energy efficiency upgrades. Specifically, the building will receive retrocommissioning of its heating and cooling systems (primarily related to software, controls, valves and motors) and a full lighting retrofit (replacing bulbs and some fixtures; adding sensors and daylight capture equipment). When it’s completed in 2013, the project will reduce energy purchases by one third from last year’s baseline. All of the building’s tenants (including the Port of San Francisco) will benefit, and savings will be applied to all occupants on a pro rata basis. The changes have been calibrated so as to not generate excess energy that needs to be sold back to the grid.

Piloted in Berkeley in 2007, the PACE program uses local governments’ taxing or bond-issuing authority to fund projects that have a public benefit. The PACE-Prologis project is 100 percent privately funded, with bonds issued to private investors. Repayments are made through the property tax billing system, which allows for longer terms (up to 20 years). The property is the collateral and repayment obligations transfer to the new owner if the building sold. The interest is federally taxable and California tax-free.

A challenge to the PACE program is that the loan agreements from residential and commercial lenders typically prevent land owners from further encumbering their properties without the lender’s approval. Since the PACE bonds are repaid through increased property taxes, the bonds are effectively senior in security to the lenders’ loans. Some lenders may be reluctant to approve PACE financing unless they are confident that the resulting energy savings will translate into a sufficiently higher property value so that their positions are not impaired. One approach to lender reluctance is for the lender itself to purchase the PACE bonds. In that case, the lender is only subordinated to itself and gets the benefit of the investment in the PACE bonds.

Potter’s firm partners with companies that have demonstrated a proven demand for their products. So while there’s no consumer adoption risk, the companies are usually facing operational and scale challenges to reach the next level. Typically, they are $5-10 million companies poised to scale their businesses, often to north of $100 million.

Identifying these optimal risk-reward companies is more science than art. San Francisco Equity Partners is particularly focused on its companies’ channel strategy. That is, a given beauty product can’t successfully be sold at both Sephora and Wal-Mart. Channels include food (Safeway), drug (Walgreens), mass (Wal-Mart), club (Costco), prestige (specialty retailers and department stores) and direct-to-consumer (online and direct-response TV). Determining the right channel for products is often a company’s key to success.

A growing channel is the so-called natural channel, as epitomized by Whole Foods, which is separate from the traditional grocery channel. But Potter’s firm specializes in natural products that are targeted for the mass channel. Companies targeting this channel should not ask consumers to pay more for an inferior product “just to save the fish,” Potter says. Rather, the product’s value proposition has to work in and of itself outside of sustainability and natural missions. The prime example is Method products.

When San Francisco Equity Partners first invested in Method, it was producing just hand and cleaning products. It has evolved to include bathroom and specialty products and even successfully launched into the competitive laundry space. Early on, Method knew it would never have the marketing budget of Proctor & Gamble. So it chose to overinvest in packaging, focusing on the point of sale: when product is on the shelf. Method’s in-house design team devised a distinctive look, including the bottle molds, and focused on the aesthetic and the user-experience (such as the one-hand laundry detergent dispensing system). With the “design baked into the products,” Method aspired to be like Apple.

At what kind of store are you most likely to purchase natural products?

October 9, 2012

In Episode 76 of The Wendel Forum (originally aired on September 15, 2012, on 960 KNEW AM radio), show moderator Dick Lyons, co-founder of Wendel Rosen’s sustainable business practice group, welcomes Ben Lee, director of business development at San Francisco-based CircleUp, a crowd funding platform founded in April.

Ben Lee of CircleUp

CircleUp provides an online mechanism for consumer products companies and retailers to reach out to a broad network of potential investors, who may fund the companies in exchange for equity. CircleUp, which affiliated with WR Hambrecht, takes a commission.

So far, they’ve received 600 applications; they’ve selected 10 companies and four – including a baby skin care brand and an organic food brand – have been successfully funded. CircleUp’s team serves as a curator for the investors. In evaluating companies, they look for businesses with $1 million to $10 million in annual revenue. Usually these companies are seeking to raise $500,000 to $2 million to launch new products and achieve the next stage of growth. The typical investment is $5,000 to $25,000 (while each company’s offer is different, these are generally in the form of preferred stock shares); CircleUp assists with larger transactions offline.

While CircleUp streamlines what can otherwise be a year-long funding process, raising money through the platform can still take several months. Although CircleUp selects companies and presents opportunities, investors must do their own due diligence. Like any private company investment, crowd funding is risky and the investment horizon may be three to seven years.

Lee says CircleUp’s goals include enhancing the ecosystem around consumer products, helping as many small consumer brands get financing as possible, and making sure CircleUp’s platform is a great experience for investors and companies.

Have you participated in crowd funding? What do you see as the biggest opportunities and challenges to this form of financing?

Roth brings his experience as a senior executive and investor in companies in a wide range of industries to green businesses and double-bottom-line companies, those companies for which a social goal — like benefiting the community or the environment — co-exist alongside profit goals. For those companies, the biggest issue is balance, Roth explains. Companies can’t forget that profitability is what allows a company to be generous and, therefore, profitability must remain the core operational focus. Companies shouldn’t become so enamored with a social mission that they lose the ability to fund it.

The average double-bottom-line company devotes about 5 percent of sales to a social mission. The more profits earned, the more impact the company can have. Ben & Jerry’s was one of the first and most successful double-bottom-line companies. “On a public relations basis, charitable endeavors are a big part of their raison d’être.”

Companies can also donate employee time – within limits. In the 1970’s, Xerox was one of first companies to devote its human resources to help the community, and some employees were even promoted on that basis. But Xerox diverted too much attention from its core business and now no longer exists. “It’s an educational tale.”

Another business challenge for these companies is making the charitable work relevant to customers. Many businesses in the coffee industry, for example, donate money back to the cooperatives that grow their beans. It may be more expensive to source products from those areas. As a result, customers may need to pay higher prices or the company may have to accept lower profits. “Corporate communication is critical to justifying the premium” customers may have to pay, especially in a competitive marketplace where consumers have many choices. The customer must be educated about the social benefit of buying that product.

Roth and Dick also discuss socially responsible investing.

What social causes would inspire you to purchase products from double-bottom-line companies, even if the prices were higher?

May 9, 2012

In Episode 61 of The Wendel Forum (originally aired on May 5, 2012, on 960 KNEW AM radio), show moderator Dick Lyons, co-founder of Wendel Rosen’s sustainable business practice group, welcomes Rachel Barge, a partner at Greenstart, which is a San Francisco start-up accelerator. Greenstart helps new companies that use software to solve clean tech problems.

Rachel Barge of Greenstart

Twice a year, Greenstart, which launched last year, sifts through hundreds of applications and offers a handful of clean-tech start ups seed-stage venture capital as well as training in the company’s 12-week boot camp. Specifically, Greenstart invests $15,000 in exchange for a 15% equity stake, it makes a $100,000 convertible loan and it provides concentrated training. The three-month academy “crams two years of development into three months,” according to Barge. Entrepreneurs learn to validate their technology (proving customers exist for the product), develop a 12-month execution plan (including building the team and honing the financial model), and communicate (to investors, team members, channel partners and customers). Entrepreneurs are paired with mentors, including executives from cutting-edge companies like Tesla and Pandora. The program’s culmination is “Demo Day,” during which the start ups pitch hundreds of potential investors.

Software, Barge explains, is key to what she calls “clean tech 2.0.” For example, the collaborative consumption trend, which replaces ownership with use and access, requires new software platforms. That’s why Greenstart selected for its program Scoot Networks, which provides shared electric scooters that customers can unlock with an iPhone.

Barge explains Greenstart’s unique application for companies that want to apply to the Greenstart program. The entrepreneurs must state the dirty energy problem they’re solving and explain their technology in just 250 written characters and a two-minute video. The accelerator is particularly interested in working with fast-to-market products. The company’s first class included SmarterShade, a self-tinting windows company; Sylvatex, which cheaply mixes biofuels with diesel; Wa.tt, a consumer web app company that “gamifies” energy use on Facebook; and Tenrehte, a wireless system for managing energy flowing through electrical plugs.